Thursday, June 13, 2013

Euro zone: the common cycle is strong

The general thinking is that if you want to create a monetary union, a strong prerequisite is that the business cycles in the involved economies should be well synchronized, among other criteria. The reason is obvious: it allows consensus regarding monetary policy. This synchronization may arise after the merger, though, facilitated by the currency area.

Periklis Gogas looks at the Euro-zone and comes to the conclusion that synchronization has increased, especially with the last global recession. While the paper has plenty of robustness exercises, I fail to be convinced, though. Indeed, this supposed trend is based on two, maximum three, business cycles. And the last recession was of a different kind, being global, so it is difficult to avoid having it more synchronized than any other in the sample. You may argue that there are 86 quarterly observations and this is sufficient for statistical significance. But when you look at such questions, it is turning points that matter, and you only have a handful, and they do not look like a random sample of the population.

1 comment:

Periklis Gogas said...

The turning points are not a few. They are 50-50 as the synchronization is investigated on the HP-Cycle so that in every quarter we are either above or below trend.

Periklis Gogas